Productivity for accounting firms: The Productivity Paradox

By Posted in - Public Blog on March 12th, 2017 0 Comments

I’ve always found it curious that the Key Performance Indicator (KPI) many accounting firms call ‘Productivity’, is not actually a measure of productivity.

The KPI I’m referring to is more accurately termed ‘Utilisation’. I use the term ‘KPI’ loosely here because neither the K nor the P apply to this measure:

  • it’s not Key and
  • it’s no indication of P

In Business Fitness’ annual benchmarking report, The Good, the Bad & the Ugly of the Accounting Profession, the KPI of Productivity is defined as:

Number of hours charged compared with the number of available hours.

In other words, what percentage of hours that could have been logged in timesheets against chargeable (revenue-producing) jobs, was logged in timesheets.

The Good Bad Ugly study lists this measure in 3 ways:

  • Productivity — All FTEs: Productivity of all employees including partners
  • Productivity — Chargeable: Productivity of all chargeable employees including partners
  • Productivity — Equity Partners: Productivity of equity partners only (salaried partners excluded)

Measuring true productivity

As I’ve discussed in The Write-Offs Paradox and The Timesheet Paradox, I think that traditional timesheets are a waste of time,  are painful to maintain and police, and are damaging to businesses. (However, I do believe in the usefulness of modern time-tracking tools such as Toggl, as I shared in The Hourly Rate Delusion.)

But if we want a measure of true productivity within an accounting firm—not a measure of how much people ‘fill up’ their timesheets—what is it?

For chargeable staff, clearly they are there to produce (that is, earn) revenue. So the productivity measure needs to be a financial measure. KPIs here can include:

  • Revenue (fees) earned — per month, per quarter, annually
  • Gross profit earned — per month, per quarter, annually

From this comes the percentage of the target (actual vs budget) achieved in these measures.

Whether a chargeable team member works—and logs in timesheets—20, 40 or 60 hours a week bears no relation to the value delivered to clients, and therefore revenue earned.

Value does not equal time

The number of hours taken to complete an engagement also has no logical correlation with the value delivered to the client. Time is simply not a part of the value equation of Value = Benefits ÷ Price

Therefore the measure of Productivity (Utilisation) is not important as a performance measure.

The benchmarking statistics back this up: There is no correlation between high productivity (utilisation) and high profitability. Consider this example from the recent Good Bad Ugly study of two firms in the $1.5m – $4m revenue group:

  Firm 1 Firm 2
Billed Revenue $3,423,589 $3,790,329
Productivity – ALL FTE 66.6% 46.6%
Productivity – Chargeable inc Partners 78.5% 54.7%
Net Profit per FTE (Before Partner Salaries) $92,247 $106,303
Partner Return on Effort $300 per hour $313 per hour
Net Profit % (After notional $200k p.a. per partner salary) 32.8% 33.5%

 

  • Firm 1 has much higher productivity (66.6%) but is less profitable.
  • Firm 2 has lower productivity (46.6%) and yet higher profitability.

What this means for productivity

The difference between the two firms comes from the services they provide. Firm 2 has a service mix where value–add advisory services comprise 25% of their revenue For Firm 1 that figure is below 10%. Interestingly, Firm 1 has more than three times as many clients (1,500) than the more profitable Firm 2 (480 clients). (This is what we term a ‘High Clientshare™ firm: it has fewer clients but they add more value to them, creating much higher value (and happier) clients.)

So if the management team of Firm 2 cracks the whip on the team for “low productivity”, they’d miss the point. Each Full Time Equivalent team member is producing over $100,000 per annum in Net Profit.

Ninety percent of firms surveyed in the last Good Bad Ugly study reported that they still use timesheets, but sixty percent of these firms use them for tracking job cost (staff cost to deliver), and not for pricing jobs.

A more commercial measure than revenue is cash inflows. As the adage goes, “Profit is theory, cash is fact,” and this also applies to revenue: not until the cash is in the bank is it of use to the business.

Cash banked, not revenue billed

Therefore, rather than track and reward performance on revenue billed, if you base it on cash banked. Then each accountant and advisor has a higher care factor about whether the client will be happy enough to pay and pay promptly.

This brings into play other performance measures outside of productivity, such as:

  • efficiency measures — e.g. job turnaround time (days), and
  • quality measures —e.g. Net Promoter Score to assess client loyalty and likelihood to refer

Fast job turnaround times translate into faster payment by clients. Likewise, better communication and client service means happier clients.

What about profitability as a KPI?

If a chargeable team member hits their revenue (fees earned) target in a given period, then they’ll automatically achieve the target profitability—assuming you’re capping your input costs by paying them a fixed amount. This could be a salaried employee or a subcontractor who agrees to work on value-based (a.k.a. ‘fixed quote’) pricing.

So you essentially bake in your profitability at the outset with:

  • your value-based pricing: charging what the job is worth to the client and in the marketplace, not based on the time it takes to do the work; and
  • your capped costs to deliver the services.

On the other hand, if you have variable input costs linked to how long the job will take, your profitability will vary across engagements.

Another advantage of having dollar-based rather than time-based productivity measures is the real-world commerciality it brings to your team. Once they understand concepts such as:

  • cost of seat — how much it costs the business just to have them sit at a desk, before they even produce anything, due to the many overheads and expenses the business pays, in addition to the direct costs of their remuneration and benefits, and
  • ROI — the need for the business to achieve a target Return On Investment on that capital invested…

… then they naturally come to realise that it doesn’t matter “what’s on the clock” in productivity and work-in-progress measures; what matters from a productivity standpoint is what’s billed, what’s collected, client happiness and client retention.

The Productivity Paradox

Accounting firms are business advisors yet they
mistakenly invest time and effort tracking
a measure they call ‘productivity’ but which
has very little to do with productivity.

In the Comments area below, share your thoughts and experiences around how you measure and monitor ‘productivity’ in your accounting firm. Are you still placing productivity (utilisation) targets on your team? Or do you focus on financial measures of productivity? Or a combination of both? I’m keen to hear.

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